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Monday, February 17, 2014

Giants don't know Jack

Little Jack can be pretty scrappy.


New procurement rules for prison stores scrapped
A chief state procurement officer has nixed changes in how Illinois purchases snacks, toiletries and other goods sold to prison inmates — apparently heeding criticism from small businesses that they gave supply giants an unfair advantage.

State puts hold on bids for prison purchasing contracts
For now, the move means small businesses selling everything from prison-approved Nike shoes to tins of sardines will continue to do business with individual prisons as they've done for years. Matt Brown, the chief procurement officer overseeing contracts for major state agencies, issued his ruling earlier this month, saying a number of irregularities made it necessary for a massive do-over of the bidding process.

Currently, each of the state’s prisons stocks its own canteen, working directly with a number of national and local suppliers to get items such as pallets of chocolate chip cookies, boxes of Nike shoes and cases of potato chips. Keefe Coffee and Supply Co. of St. Louis controls about 30 percent of the inmate market, with an estimated 180 companies -- many of them homegrown, Illinois businesses -- taking a share in the remaining 70 percent of the sales, according to a state study of the commissaries. Brown said the setup as outlined by the Illinois Department of Corrections could have resulted in only one company being deemed qualified to win a contract that could be worth as much as $30 million in sales.

More than a decade ago, however, Auditor General Bill Holland began raising red flags about the supply chain, saying goods being sold at the prisons were being purchased outside of the proper state bidding channels. More than three years ago, Illinois Department of Corrections officials began to draft a new plan designed to centralize commissary purchasing.

The rules that were drafted, however, enraged local suppliers, who said they wouldn't be able to compete if they had to bid on selling products to every state prison or even to a segment of the market grouped by geography. Some companies, for example, sell their wares to just one or two facilities.

Even more vexing for the local companies was a concern voiced by top prison officials that the changes wouldn't result in any savings for the state. In a September meeting with vendors, Corrections Chief of Staff Bryan Gleckler acknowledged that concern. “There may be areas where costs go up; there may be areas where costs go down,” he said during a meeting attended by a number of worried vendors.

"They know they need a new commissary program," Brown said.

At the same time, however, local prison officials say the state needs to realize that local businesses are valuable when it comes to not only prices, but service and reliability.
This is a classic case of the principle of getting bang for taxpayer buck running up against the principle Prof. Steven L. Schooner of George Washington University calls the wealth distribution principle.  I'm not entirely fond of that label since, in local preferences at least, there are macro economic principles that could well justify spending tax dollars where they are raised rather than draining them from the local economy, especially in a pretty much closed economy as on a small island in the middle of the Western Pacific like Guam.  I don't see that so much as wealth distribution as wealth conservation.  I would prefer a term like social preference, but it's his Desiderata. 

Blind adherence to lowest available cost leads to market dominance and control by one or few suppliers (monopoly or oligopoly, thus reducing competition, so-called creative capitalism, and innovation) while blind pursuit of spreading the contracting dollar around the community, such as a buy local preference, means paying higher prices than available from the big guys, greater transaction cost from multiple suppliers, and increased cost of contract administration.

Professor Schooner has written about this inherent conflict of procurement goals in his famous Desiderata: Objectives for a System of Government Contract Law available here and here

As Matt Brown, back in Illinois, tries to decide how to reconcile the various interests in his predicament, with a view to creating an improved commissary system, he may well want to consider the Desiderata:
Sometimes the most simple questions prove the most vexing. For example, what does your government hope to achieve through its government procurement law? It is possible to draft and enact a new law without answering the question, and experience demonstrates that this is often the case.  Nonetheless, it seems reasonable to attempt to describe general aspirations for a procurement system before drafting begins.

At a macro level, the author prefers to begin with three “pillars” that, in my opinion, underlie the United States procurement system: system transparency; procurement integrity; and competition. Yet, there is no universal agreement that a procurement system should be premised solely upon transparency, integrity, and competition. Other goals merit discussion.

Historically, our elected representatives have viewed our procurement system as a vehicle to distribute wealth. For example, our government has chosen to leverage its purchases to support domestic firms and, more specifically, small businesses. It is axiomatic that government spending can influence behaviour and infuse growth in communities and economic sectors.

No system can achieve all of these goals. Nor can a state expect that its objectives for its system will remain constant over time. Determining which goals are most important is a daunting, ever-evolving challenge. Because no system can achieve all of the goals here (or the many not discussed), your desiderata entails important tradeoffs."
Or, as Prof. Schooner told us here on Guam (see, Working a good man hard), "You can't have it all".

It is all about balance and priority. For most, transparency and integrity and low prices achieved through competition represent foundational, primary principles. To the extent that you must give up some degree of transparency, integrity or competition to achieve other goals, to maintain the primacy of the foundation principles, the procurement system should implement brakes or safeguards to make up for the effects of the lessened primary principles.

Thus, although it may be possible to achieve the lowest cost by dealing with one vendor under a centralized procurement regime, there may also be savings achieved through more uniformity of acquisition and transactional costs through centralization which makes the marginally higher cost of dealing with more regional suppliers palatable, without even factoring in the broader economic benefits.


Sunday, February 9, 2014

The Canadianization of military procurement

Iain Hunter: Defence procurement is not about war
Last week, Public Works Minister Diane Finley outlined for defence contractors and lobbyists a new strategy to be run by a secretariat in her department that will challenge expressed military requirements and emphasize “international sales opportunities” for Canadian companies engaged in filling them. She said conditions attached by military planners to procurements “too often appear to be set to achieve pre-determined outcomes.”

In other words, the brass is setting specifications that are so precise that they favour the plane or truck they think is best, and therefore one bidder. And with one bidder in the running, the price inevitably is higher, and better economic spinoffs might be lost.

It wasn’t long ago that nations acquired things like tanks, ships and planes solely for the purpose of fighting wars. Today, the tanks, ships and planes are called platforms and their purpose is not just military.

Defence procurement in Canada also is about things like industrial and regional benefits, value to the Canadian economy, global markets and thriving domestic defence contractors.

There might be some retired colonels and commodores who find this odd, but in an age when so much stuff rusts out before it can be used in battle, and when new technologies have to be found to meet rapidly changing threats, a lot more than defence of the realm is at stake.

And as new “platforms” become more expensive, it makes sense to upgrade and maintain existing ones. Canadian defence analysts say that for every dollar, or million dollars, spent to acquire a new engine of war, five dollars or $5 million will be spent to keep it working over a life cycle of 30 years or more.

And that means that when the shiny new engine is unpacked, Canadian firms must find in the crate a guarantee that they have the terms and conditions, including access to intellectual property, to do the maintenance.
- See more at: http://www.timescolonist.com/opinion/iain-hunter-defence-procurement-is-not-about-war-1.842878#sthash.EHTfhdGE.dpuf
Canada revamps military procurement policy after controversies
Defense is one area where countries are allowed under international trade rules to favor their own industries. The question then becomes one of how much more governments are willing to pay to get domestic benefits. In addition to the governance changes, Finley will also now require that bidders for major projects put together a "value proposition" that will show what industrial spinoffs and subcontracts would go to Canadian companies. This would be given a 10 percent weight, suggesting that companies promising rich industrial benefits to Canada could still win even if their costs are slightly higher than those of their rivals.
Leveraging Defence Procurement to Create Jobs and Economic Growth in Canada
The three key objectives of the Defence Procurement Strategy (DPS) are to: deliver the right equipment to the Canadian Armed Forces (CAF) and the Canadian Coast Guard in a timely manner; leverage our purchases of defence equipment to create jobs and economic growth in Canada; and streamline defence procurement processes.

The Defence Procurement Strategy (DPS) represents a fundamental change in the Government of Canada's approach to defence procurement.
New plan for military procurement dilutes power of defence department
Finley sought to assure Canadians “that the capability of our men and women in uniform will remain paramount.” But she also left no doubt that the government is counting on industry turning $240 billion in planned defence spending over the next two decades into high-value, high-skill jobs.

“The defence procurement strategy underlines the goals that our government has had from the start,” she said. “Jobs, growth and economic prosperity. That’s what we pledged to Canadians. And that’s what we’ve been delivering.”

Defence officials had quietly expressed concern about military procurement being shifted too far towards business interests, warning in a secret briefing in November 2012 that National Defence “would, all things being equal, likely obtain less equipment and services.” The warning is rooted in fears the government will end up paying a premium to buy Canadian or boost otherwise boost Canadian industry, which is what is already happening with the government’s $38-billion national shipbuilding plan.
Canada Unveils Sweeping New Procurement Rules
The government’s initiatives closely follow a report from the Canadian government’s procurement adviser issued last year, which recommended that foreign defense companies be required to provide domestic companies with quality offset work in a number of key areas such as cybersecurity, training systems and soldier protection. The 88-page report, titled “Canada First: Leveraging Defence Procurement Through Key Industrial Capabilities,” was aimed at addressing growing frustration among Canadian defense firms that complain they have seen little quality work from the billions of dollars of military contracts announced in the past several years by Canada’s Conservative Party government. Those include the purchases of tanks, helicopters and transport aircraft.

The report from Tom Jenkins, special procurement adviser, noted that the Canadian government intends to invest CAN $240 billion (US $216 billion on new defense equipment in the next 20 years.

It recommended developing, at least initially, key industrial capabilities in six areas: Arctic and maritime security, soldier protection, command and support, cybersecurity, training systems, and in-service support. Foreign firms that want to bid on Canadian defense contracts would be required to provide offsets in those areas and would receive better consideration for their bids if they provide Canadian companies with work on international programs.

In their announcement Wednesday, Finley and Nicholson noted that an export strategy will also be developed to support international sales of Canadian defense products. Key industrial capabilities that the government wants to promote among industry will also be identified and highlighted.

The government also plans to provide more information to industry about military procurements, including informing companies early on about projects and publishing an annual acquisition guide to outline its priority programs.

The Defence Procurement Secretariat to be established within Public Works would provide expertise needed to oversee purchases of military equipment. The secretariat will use the principles of early and frequent engagement, independent advice and efficient decision-making to streamline defense procurement processes, the ministers stated.

An independent, third-party Defence Analytics Institute to provide expert analysis to support the objectives of the Defence Procurement Strategy will be established.

Tim Page, president of the Canadian Association of Defence and Security Industries, called the move a “critical and positive milestone” that will enhance security and economic interests. The association represents more than a 1,000 defense and security companies in Canada.
Ottawa to curb military’s role in procurement after costly delays
The dysfunctional record of military procurement in the last eight years – from light-armored combat vehicles to joint support ships to F-35 fighters – has hurt the Conservatives’ carefully cultivated reputation as prudent stewards of the public purse.

Wednesday, Mrs. Finley and Mr. Nicholson will announce they’re going to require that military suppliers provide more high-value industrial spinoff work for Canadian companies and well-paying jobs. The government is dissatisfied with the industrial regional benefits it received for several big purchases of military aircraft.

Major military purchases in Canada have frequently lacked what critics call a single point of accountability because as many as three or four government departments play a part in selecting what to buy – decisions that are sometimes made in isolation from one another.

National Defence currently has particularly strong influence because it first draws up specifications for what features it needs in equipment – which can result in the department effectively picking a supplier before a competition is held.  Defence officials will still have a central role in deciding what to buy for the Canadian Armed Forces, but other departments and outside advisers will now have the ability to properly question what is being requested.

This will change with what is unofficially called the “super secretariat,” a term the government does not embrace but which captures the concentration of decision-making taking place.


For instance, as one person who was familiar with the Wednesday announcement said, if the request is for a “Cadillac and you actually need a Corolla” then the system needs someone who “has the authority to ask why do you need this Cadillac?”

Part of the focus Wednesday will be on using defence spending to develop a competitive advantage in certain technologies. Foreign companies play a large role in supplying Canada’s military needs, yet in the past 30 years, this country has shied away from using defence policy to promote and build domestic industries.
Military defeated in war over procurement reform
Liberal defence critic Joyce Murray on Wednesday seemed prepared to hold her most serious criticisms to see if the government's proposed changes might have a positive effect. "It’s good that the government has admitted their failure," Murray said.

"I hope, as I think most Canadians hope, that they can do a better job ... with this new procurement mechanism. At the same time, you have to wonder whether adding a layer of bureaucracy and continuing to add additional ministers and deputy ministers into the pot, is actually going to be the correction that is needed. I don’t see clear improvement here," she added. "But let’s be optimistic. They can’t do a lot worse than has been done so far."